The Apothecary, a blog about health care and entitlement reform, is edited by Avik Roy, a Senior Fellow at the Manhattan Institute for Policy Research and a former health-care policy adviser to Mitt Romney. Avik also writes a weekly column on politics and policy for National Review.
The other contributors to The Apothecary are: Josh Archambault, Director of Health Care Policy at the Pioneer Institute in Boston; Robert Book of the American Action Forum; Chris Conover, Research Scholar in the Center for Health Policy and Inequalities Research at Duke University and an Adjunct Scholar at the American Enterprise Institute; Nicole Fisher of the University of North Carolina; John R. Graham of the Advanced Medical Technology Association; and Jeet Guram of Harvard Medical School.

Holtz-Eakin and Roy: The Critics Are Wrong About the Future of Free-Market Health Care Reform

Earlier this week, the two of us—Douglas Holtz-Eakin and Avik Roy—published an op-ed for Reuters in which we outlined a market-based plan for entitlement reform and universal coverage that builds on a reformed version of Obamacare’s subsidized insurance exchanges. The piece generated a lot of media reaction, both positive and negative, so we felt obliged to respond to our critics. Is free-market reform a “surrender” to Obamacare? No. Are we ignorant of the policy issues associated with a Swiss-style regulated, subsidized insurance market? Hardly. Consider this piece our all-purpose rebuttal to Matthew Yglesias, Paul Krugman, et al.

The Swiss paradigm

As a reminder, the basic framework that we advocated—one that Avik has also discussed at National Review and Forbes—involves first making substantial reforms to Obamacare’s exchanges. We seek to reduce the cost of insurance on the exchanges, expand consumer options, and improve the exchanges’ fiscal sustainability. After we reform the exchanges, we can gradually migrate the Medicare and Medicaid populations onto the exchanges, by slowly raising the eligibility age for Medicare, and reducing the income threshold needed to gain eligibility for subsidized coverage.

The end result would be a health-care system that resembles a slightly less-regulated version of Switzerland’s. Swiss government entities spend 60 percent less on health care than American ones do, and yet Switzerland enjoys universal coverage, timely physician appointments, and broad access to the latest medical technologies. (For more on the Swiss health-care system, see Avik’s lengthy write-up from 2011 and this edited excerpt from Regina Herzlinger’s study of the system.)

Liberal gloating is premature

The first set of commentary about our op-ed wasn’t so much focused on the policy aspects of the proposal, but more a political celebration of our acknowledgment that Obamacare is here to stay. “Obamacare is winning,” announces Ezra Klein. “Gone is the millennial struggle to preserve the dying embers of freedom,” exults Jonathan Chait. “From me, no gloating, no ‘I told you so,’ no smugness. Instead, I feel appreciation for common sense overtaking extremism and myopia,” says John McDonough. “This isn’t an alternative to Obamacare,” chortles Matthew Yglesias. “It’s a negotiated surrender.”

It’s hardly that; Ed Kilgore is more on the mark in describing it as a “strategy…that sells itself as a reform of the post-ACA health care system instead of a restoration of the pre-ACA status quo ante.”

Yglesias claims that in 2009, Democrats were open to something resembling our framework, and only Republican intransigence prevented such an outcome. (David Frum joins in to say “I told you so.”) This is demonstrably false. Democrats would have never gone along with applying the exchanges to Medicaid—and especially Medicare—in exchange for Republican acceptance of Obamacare. Indeed, as John McDonough has documented, Democrats balked on accommodating modest Republican ideas because they would have cost 10 to 15 Democratic votes on the bill.

Yglesias says that Democrats should only go along with free-market reforms if they get something in return, like “introducing a reasonably strong public option” or “higher taxes.” But his negotiating strategy ignores an important point: our free-market roadmap involves a substantial redistribution of wealth, because it takes subsidies that now go to wealthy retirees, and redirects them to the poor.

Remember that Obamacare doesn’t achieve universal coverage. Even after Obamacare is fully implemented, there will still be 30 million uninsured Americans. By contrast, the market-based approach that we propose would achieve truly universal coverage, while improving the health outcomes of the poor, by replacing Medicaid with a more generous form of health insurance.

If Democrats want to stand in the way of such a proposal out of partisan spite, that’s their choice. But it’s not a morally or politically riskless choice.

The extraneity of community rating

Paul Krugman thinks that he has found a “gotcha” moment in our proposal because we believe that Obamacare’s community rating provision should be replaced. Aha! says Krugman. “Switzerland has community rating…Maybe Holtz-Eakin doesn’t know anything about this—but wasn’t Roy supposed to be a conservative expert in this field? Are they really unaware of the basics here?”

Yes, we are aware. (A simple Google search might have helped Prof. Krugman look into this.) Community rating is an undesirable feature of both Obamacare and the Swiss system, and hardly essential to either, as any actuary will tell you. By forcing twenty-somethings to pay two to three times what they should pay for health coverage, community rating creates adverse selection. It encourages young people to drop out of the system, leaving only older and sicker people in the risk pool, and driving up the cost of insurance for everyone else.

There is an obvious alternative to community rating as practiced by Switzerland and Obamacare: require insurers to charge the same rates to those within a specific birth year, regardless of gender or prior health status. The vast majority of the variation in health risk is accounted for by age; eliminating age-based community rating would do much to counteract the incentives for adverse selection that are contained in the Obamacare exchanges. Remember that Obamacare’s individual mandate, the thing that is supposed to force young people to buy overly costly insurance, is quite weak.

In our approach, all 24-year-olds might pay the same rate for actuarially equivalent insurance. But that rate would be much lower than the rate that all 41-year-olds would pay, or that all 62-year-olds would pay. That’s a fairer, less expensive, and more economically sound system than what both Obamacare and Switzerland impose.

Krugman complains that Switzerland spends a lot on health care—which is perfectly normal for a wealthy country—and he confuses overall national health expenditures with public health expenditures. Conservatives are particularly concerned about the growth in government health spending, because we are committed to ensuring that America remains solvent. As I describe here, and in the chart below, Switzerland and Singapore are far ahead of the U.S. and western Europe on this score. In 2010, U.S. government entities spent $3,967 per capita on health care. Switzerland spent $1,628. In 2009, Singapore spent a mere $762.

And Krugman’s attack on the Swiss system is particularly hilarious, given that, as he acknowledges, in 2009 he wrote that “a Swiss-style system of universal coverage would be a vast improvement on what we have now. And we already know that such systems work.”

No, Switzerland is not a libertarian utopia

In fairness to Paul Krugman, his post on our op-ed is, in effect, an uncritical regurgitation of ones by Josh Barro and Aaron Carroll that are similarly snarky—and similarly flawed.

Strangely, Aaron claims that private non-profit insurers in Switzerland are “closer to a ‘public option’ than anything we have.” No one who follows the insurance industry would agree.

Indeed, the United States has plenty of non-profit insurers—Blue Cross Blue Shield, most notably—and their conduct in the marketplace is far closer to that of the for-profit insurers than it is to government payors.

Aaron claims that “there is no ‘public option’ here” in the United States, which ignores the fact that more than 100 million Americans will soon be enrolled in the “public option” systems of Medicare and Medicaid. A la Krugman, Aaron wonders if we are aware that Switzerland has an individual mandate and that Switzerland heavily regulates its insurance products. Indeed, as Avik has noted in the past, Switzerland is no libertarian utopia:

Naturally, such a system will not be attractive to those who implacably oppose the idea of a private health-care sector. But conservatives will also find objectionable elements to the Swiss system. In important ways, the Swiss system resembles that of Massachusetts and PPACA. The Swiss have an individual mandate. The government defines the minimum benefit package, which has been subject to expansion from special-interest lobbying, and is more comprehensive and less consumer-driven than it could be. The government has enacted Medicare-style price controls for hospital and physician reimbursement. Insurers must charge similar rates to the young and old (“community rating”), must cover pre-existing conditions, and must operate as non-profit entities. Princeton economist Uwe Reinhardt describes Switzerland as “a de facto cartel of insurers and health care practitioners who transact with one another in a tight web of government regulations…”

An American adaptation of the Swiss system would not require an individual mandate: there are market-based alternatives for avoiding the “adverse selection death spiral,” such as requiring those who opt to forego insurance to wait a few years before buying insurance again. Ideally, the American version would give insurers a lot more latitude to come up with innovative plan designs, so that insurance could remain inexpensive, while reflecting what consumers actually want. It wouldn’t force young people, just entering the workforce, to subsidize the old. Also, the Swiss system’s goal of preventing individuals from spending more than 10 percent of their income on health insurance exposes the system excessively to health cost inflation; instead, the U.S. would be better off adopting a defined-contribution system, like the one proposed by Paul Ryan, in which insurance subsidies grow at a pre-defined, sustainable rate.

Indeed, the fact that both liberals and conservatives would find objectionable elements to Switzerland is a large part of its appeal. It achieves the policy priorities of liberals (universal coverage; regulated insurance market) and of conservatives (low government health spending; privately-managed health care). Both sides could declare victory, and yet also have plenty to complain about.

In other words, Switzerland provides the contours of a bipartisan solution: one that stands a chance of gaining more than 60 votes in the Senate.

Finally, Aaron says that he would applaud anyone who offered exchange-based coverage to the Medicaid population; he implies our plan does not, when in fact that is one of its core features: a serious misrepresentation on his part.

Criticisms from the right

To conclude, we should mention criticisms of our approach that come from the right. John Goodman, one of our favorite writers on free-market health care, puts it this way:

Several studies have found that the most egalitarian health care system in the whole world is the Swiss system. So during the debate over HillaryCare and ever since, it’s always been a mystery to me why our friends on the left have talked about the German system, the French system, the Canadian system—anything but the Swiss system.

Then Regi Herzlinger discovered that whatever its faults, the Swiss system looked relatively good—individual ownership of insurance, portability, competition, private sector institutions, etc. More recently, Doug Holtz-Eakin and Avik Roy endorsed the Swiss system as the ideal reform…

Bottom line: the Swiss system is managed competition and it doesn’t work any better than managed competition works for federal employees or for state employees or any better than it will work in the ObamaCare exchanges. This is much ado about nothing.

We agree with John’s view of the ideal system: universal health savings accounts combined with catastrophic coverage. He writes compellingly about South Africa’s system in this regard. Avik has written in the past about Singapore, which blows away Switzerland on cost-efficiency by instituting universal health savings accounts. But John is making a mistake if he holds out for universal HSAs, at the expense of more politically feasible, market-oriented reforms that expand coverage and reduce federal spending.

Otto von Bismarck once said: Die Politik ist die Lehre vom Möglichen. Politics is the art of the possible. A system with universal coverage, individual choice, and fiscal sustainability is within our reach. It would be far better than the system we have now. Isn’t it worth a try?

Douglas Holtz-Eakin, the co-author of this article, is President of the American Action Forum. He served as director of the Congressional Budget Office from 2003 to 2005, and as chief economic policy adviser to John McCain in 2008. You can follow him on Twitter at @djheakin.

All over the developed world the market for health insurance has been so completely suppressed that you can find a real price for health insurance almost nowhere. In the U.S., BlueCross and other private insurers administer Medicare. They also administer private health insurance. Earth to the left: BlueCross is not good when it is called “Medicare” and evil when it is called “private insurance.” BlueCross is just BlueCross…

All these things would be great. And we should pursue reforms in this direction. But there is no advanced democracy in the world that has them, to John’s point, which should be at least one indication of their political feasibility.

UPDATE 2: Paul Krugman says he “wasn’t nearly hard enough on us,” in retrospect. The thrust of his complaint is a debate about the scale of Swiss public spending on health care. He cites an OECD figure that Swiss public health-care spending is 7.4 percent of GDP. We’re glad Krugman brings this up, because the OECD figure is due to an accounting oddity of theirs, as Avik explains here:

The OECD puts Switzerland high on the league tables in terms of government health spending, but that is due to a statistical anomaly. Switzerland has an individual mandate; the OECD defines state health expenditures to include insurance premiums that the government requires individuals to pay, even if that spending is on private insurance. That is a debatable approach from the OECD, because the spending goes directly to the insurers, without the government as a redistributor.

Based on figures compiled by Paul Camenzind for the Commonwealth Fund, actual Swiss public spending—excluding privately-paid insurance premiums—is 30.9 percent of national health expenditures. According to the OECD, overall Swiss health expenditures in 2010 were 11.4 percent of GDP; 30.9 percent of 11.4 percent is 3.5 percent. This is a more accurate comparator to U.S. public health spending.

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Your proposal is essential a political one as it would entail the passage of a new piece of legislation and would thus need support of a majority of both parties as each controls one chamber of the Congress. Further, it would involve compromise and horse trading, the Republicans would need to put something on the table that Democrats want to get them to the table at all. That is not going to happen.

2. Republicans

There is not even the slightest chance that the Republican controlled House of Representatives would ever even consider such a proposal as it would require compromise with the Kenyan Marxist-Leninist White House? Republicans are fighting Mr. Obama on every possible detail about every possible issue that they can. They cannot compromise on sequestration or the nomination of Chuck Hagel or anything else. How could they possibly compromise on health care reform which was the center of the political and ideological opposition to the Obama Administration. Even if they wanted to compromise, they cannot for fear of facing a Tea Party challenge from the right.

3. Democrats

Why would the Democrats in congress agree to such a compromise as many of them wanted something closer to the Public Option or the Single Payer program. They compromised already to get “Romneycare” (a conservative, market based program developed by the Heritage Foundation) which most were not thrilled with. They are hardly going to be inclined to compromise further. Why would they want to move further from their goal, to get what?

It would be like negotiating with the Germans to avoid WWII in 1946.

4. Conclusions

Whatever the merits of your proposal, they are moot. There is simply not the political will to arrange for their adoption. There is no reason for the Democrats to negotiate and. The Republicans cannot. Your proposal is DOA.

I think you misunderstand, David. This is not about negotiating with Obama. This is about setting conservative policy goals, goals that can be achieved when Republicans are in power with some centrist Democrats joining in. Attempting to achieve bipartisan reform with Obama has historically been a fruitless exercise.

You wrote:“This is about setting conservative policy goals, goals that can be achieved when Republicans are in power with some centrist Democrats joining in.”

I would point out again that the PPACA is in fact exactly what you are proposing. If you will recall, the Heritage Foundation proposed a health care reform proposal in 1989 (in a book “A National Health System for America” by Stuart Butler and Edmund Haislmaier) exactly in the same manner and rationale as you are now, to offer a conservative, market based system of providing health care insurance to the American people. It included an “Individual Mandate” and a government run pool of insurance providers. Notably, no conservative ever attempted to enact these proposed reforms. It was not until the then liberal Republican governor of Massachusetts introduced these ideas and was able to have them enacted into law that they became something effective.

Ironically of course, when Mr. Obama took the Heritage Foundations proposals, and Gov. Romney’s actual programs, conservatives fiercely opposed their what were their own proposals.

Why would it be any different in the future. You and Mr. Holtz-Eakin offer up a “solution”, conservatives will embrace them so long as no actually attempts to implement them, and then when it comes to time, they will just a fiercely oppose them.

2. Politics

You appear to agree with me that any attempt to address the issues that you raised is pointless for the foreseeable future. However, how does pushing the issue out to some distant future, distant time change the point? What is the political gain for either Republican or Democrats, even “centrist Democrats”, to compromise on this issue. In the last 100 years, the Republicans (or conservatives) have never offered any legislation to address the issued raised by the PPACA. Indeed, they have consistently opposed such legislation.

The reason is that they represent constituencies that do not need or profit from health care reform. Indeed, many of those constituencies have opposed health care reform exactly because it could limit their profits. There is simply no one in the base of the Republican Party with an interest in supporting the types of reforms that you propose.

Conversely, even “centrist Democrats” would gain nothing by proposing, or even supporting any changes, to the PPACA, at least along the lines of your proposals.

3. Conclusions

Republicans have historically never supported any sort of health care reform and they have no political reason to do so in the future. It is simply not in the interest of the supporters. However good or bad your proposals may been, there is no political reason for either party to embrace them.

The Independent Panel Advisory Board has not been appointed. That’s why you don’t know where it is. Republicans will filibuster any nominees, hence another attempt at “recess” appointments despite the House and Senate not having consented to one in addition to holding Pro Forma sessions every three days. Expect another court battle similar to the unconstitutional NLRB and the Dodd-Frank CPFB appointments.

I am afraid that you are mistaken. The “Death Panels” are created by the Patient Protection and Affordable Care Act (PPACA) in Section 1181, which authorized the establishment of the Patient Center for Outcomes Research Institute (PCORI), an independent, non-profit organization charged with “evaluating and comparing health outcomes and the clinical effectiveness, risks, and benefits of medical treatments, services, procedures, drugs, and other strategies or items that treat, manage, diagnose, or prevent illness or injury.”

The Independent Payment Advisory Board was created in 2010 by sections 3403 and 10320 of the Patient Protection and Affordable Care Act which has the explicit task of achieving specified savings in Medicare without affecting coverage or quality. This is not the “Death Panels”

Your confusion is quite natural as you are taking your information from former semi-term governor of Alaska Sarah Palin. Just before the SCOTUS’ ruling on “Obamacare”, the one-time vice presidential nominee wrote on her Facebook”

“The America I know and love is not one in which my parents or my baby with Down Syndrome will have to stand in front of Obama’s ‘death panel’ so his bureaucrats can decide, based on a subjective judgment of their ‘level of productivity in society,’ whether they are worthy of health care. Such a system is downright evil.”

She went on to note that the Independent Payment Advisory Board had as its goal “…to ‘keep costs down’ by actually denying care via price controls and typically inefficient bureaucracy” and that “this subjective rationing of care is what I was writing about in that first post.”

Gov. Palin was of course referring to Section 1233 of HR 3200 which discusses “advance care planning consultation” which means “a consultation between the individual and a practitioner described in paragraph (2) regarding advance care planning, if, subject to paragraph (3), the individual involved has not had such a consultation within the last 5 years. Such consultation shall include the following:

(A) An explanation by the practitioner of advance care planning, including key questions and considerations, important steps, and suggested people to talk to.

(B) An explanation by the practitioner of advance directives, including living wills and durable powers of attorney, and their uses.

(C) An explanation by the practitioner of the role and responsibilities of a health care proxy.

(D) The provision by the practitioner of a list of national and State-specific resources to assist consumers and their families with advance care planning, including the national toll-free hotline, the advance care planning clearinghouses, and State legal service organizations (including those funded through the Older Americans Act of 1965).”

So the Death Panels originally not have anything to do with the IPAB but the “advance care planning” provisions of the bill. Anyone who takes anything that the half-term Governor of Alaska says seriously about anything is be bound to be confused and confusing.

Your confused post is very amusing. It’s quite natural for someone who gets his information from MSNBC, thinks he’s a mind reader and not only affirms one Death Panel, but provides more evidence of another. Your extended rant consisting of various Sarah Palin quotes demonstrates a false, presumptuous, (and yes, confusing) notion my post had anything do to with Sarah Palin.

We’ll have panels, commissions, offices, unelected bureaucrats, etc. deciding things such as what a “quality outcome” is with a typical one size fits all leftist ideology that will wreck the health care and health insurance industries. Doctors, facilities and resources will not be able to accommodate the demand, costs and low reimbursements. Facing fines and low reimbursement will only put more strains on practitioners and hospitals. Outcomes, effectiveness and the like vary greatly across a nation with the population like the United States for a multitude of reasons, but the Democrats think they’ve got it all figured out.

Anyone who thinks the federal government can run the health care and health insurance industries and takes anything MSNBC or a president who is economically illiterate and repeatedly vows “if you like your insurance you can keep it” and “if you like your doctor you can keep your doctor…period” seriously about anything is bound to be confused and confusing.

Since you’re so fond of “the half-term governor” (who has more executive experience than Obama), you’ll be disappointed to learn the original Death Panel debate actually began under Betsy McCaughey relating to end of life protocols. If someone wants to talk to their doctor in preparation for such events, they’ve always been welcome to do so. If you wish to use health insurance to pay for a doctor’s visit that involves no treatment, that’s your prerogative, but don’t expect others to be forced by the federal government to buy coverage for something like that if they don’t want it.

In your confusion, you don’t realize the IPAB will achieve “savings” by paying doctors less to treat Medicare patients that will in turn affect coverage and quality. If a doctor refuses a new Medicare patient, their coverage is useless. More doctors will refuse Medicare altogether, also rendering “coverage” being adversely affected. Anyone can wave an insurance card around and demand they have benefits, but their benefits are of little to no use if they have long waiting times to see a doctor or have trouble finding a doctor to begin with.

Maybe seniors can make a plea to their doctors to keep accepting Medicare because Obama said “If you like your doctor, you can keep your doctor, period”. That should do the trick! Not much “quality” in losing your doctor, having difficulty finding a new one and waiting longer to find care.

Facing the true costs of Medicare and Obamacare itself, cutting care to seniors in the form of lower provider reimbursements and denied claims are the only ways to seriously reduce costs at a substantial level. It’s a program facing $38 trillion of unfunded liabilities. There will be something similar to QALF or Complete Lives System formula proposed. Whether anything like this gets implemented is another matter since Congress continues to pass a “Doc-fix” every time. The IPAB was established to give themselves some cover when it comes time to take the blame, but the Democrats will have a hard time making excuses since they passed it all by themselves.

I meant “you” in the plural, but in any event, private enterprise is incapable even in theory of provision of health care/health coverage. That’s because, among other reasons like price elasticity of medical care, a business model that maximizes profits by denying claims against premiums can’t be depended on to provide claims against premiums.

Ironically, I was myself suggesting what has turned into your “plan” two or three years ago even though I’m a huge supporter of ACA. That’s because I believe that over the next decade or two either the exchanges will evolve to dominate Medicare/Medicaid or Medicare/Medicaid will evolve to dominate the exchanges.